Sam Bankman-Fried testifies deputy failed to hedge ahead of FTX collapse

By Luc Cohen and Jody Godoy

NEW YORK (Reuters) – FTX founder Sam Bankman-Fried testified on Monday that the collapse of the cryptocurrency exchange was precipitated by the head of his Alameda Research trading firm failing to adequately hedge against a downturn in the market.

Testifying in his defense for a second day, the 31-year-old former billionaire said that he asked Caroline Ellison – chief executive of Alameda Research and his former romantic partner – to make trades that would offset the risk of falling cryptocurrency prices starting in mid-2022.

Answering questions from his defense lawyer, Mark Cohen, Bankman-Fried said Ellison became emotional when he discussed the risk of Alameda – which had lent funds to FTX executives and invested in startup companies – going bankrupt.

“She started crying,” he said. “She agreed that Alameda should have hedged, she also said that maybe it shouldn’t have made some of the venture investments.”

Ellison is one of three of Bankman-Fried’s former close confidantes who pleaded guilty and testified for the prosecution.

Bankman-Fried has pleaded not guilty to two counts of fraud and five counts of conspiracy. Prosecutors have said he looted billions of dollars in FTX customer funds to prop up Alameda, make speculative venture investments, and contribute to U.S. political campaigns. If convicted, he could face decades in prison.

FTX collapsed in November 2022 amid a wave of customer withdrawals after reports raised concerns about Alameda’s balance sheet.

Cooperating witnesses earlier told the jury that Bankman-Fried posted or directed others to post misleading messages on social media to give customers false assurance about FTX’s health in a bid to stop a run on deposits.

Prosecutors are expected to challenge his assertion that he did not steal billions of dollars in customer funds during cross-examination, which could come as early as Monday afternoon after his direct testimony concludes.

During six hours of testimony on Friday about events earlier in 2022 and in prior years, Bankman-Fried admitted to making “mistakes” that hurt FTX’s customers and employees, but said he never set out to take customers’ money.

A key piece of Bankman-Fried’s defense is making clear to the jury that FTX customers, including Alameda, were allowed to trade on margin, which meant borrowing from other customers’ deposits.

The Massachusetts Institute of Technology graduate told jurors on Friday he was “very surprised” when he realized in October 2022 that Alameda had borrowed $8 billion from deposits that FTX customers sent to the exchange, and that the loan was not listed on Alameda’s main account. But said he believed the hedge fund’s assets were large enough to pay it back.

Bankman-Fried said on Monday that while he was concerned, the $8 billion liability did not alarm him.

“If it were far larger I would have been calling a crisis,” he said.

His decision to testify in his own defense is risky, as it opens him up to probing cross-examination by prosecutors. But legal experts told Reuters he may have viewed taking the stand as his best shot at countering testimony from the three cooperating witnesses that he directed them to commit crimes.

U.S. District Judge Lewis Kaplan has said jury deliberations could begin by Thursday or Friday.

(Reporting by Luc Cohen in New York; Editing by Will Dunham and Nick Zieminski)